Saturday, May 06, 2006

Richard Inder: Hitchhiker's guide to regulation

One of the most hilarious episodes in Douglas Adams' Hitchhiker's Guide to the Galaxy is his description of the colonisation of Earth by the Golgafrinchams.

The colonists, humankind's ancestors, were the useless and unwanted third of the Golgafrincham civilisation - telephone sanitisers, hairdressers, and advertising account executives.

Those who remained on the planet - the leaders and the workers, the people who actually did things - had concocted the fiction that Golgafrincham was threatened by a mutant star goat. They then packed the colonists into a ship called the "B Ark" with the promise that they would follow in two other ships, which were of course never launched.

They also arranged for the ship carrying the colonists to crash on Earth to ensure they never returned to Golgafrincham.

When they arrive on Earth, it quickly becomes apparent the Golgafrinchams are woefully unprepared to fend for themselves. This is aptly demonstrated by their efforts to recreate technology as basic as fire and the wheel. The former endeavour is delayed while a committee investigates matters such as what people expect from fire and how they will relate to it. The wheel is delayed because another committee cannot agree what colour it should be.

Adams does not often feature in the pantheon of great economists. But these points (and many other episodes in the classic "trilogy in five parts") are salutary, especially after two key regulatory decisions of the past weeks - the move to open up Telecom's network to competitors and the Electricity Commission's rejection of Transpower's line through the Waikato to Auckland.

Adams is arguing that bureaucracy can mire simple and vital decisions in complex and woolly thinking.

The commission's decision on Transpower gives perhaps the greatest pause for thought. Attached to the decision, commissioner David Close highlighted what he called his "deep and fundamental" reservations about the way the regulator had reached its conclusion.

Without getting into the detail, his objections centred on the grid investment test. This is an assessment of Transpower's proposals against alternatives the regulator concocts. It is also a key plank of the regulator's decision-making process.

Yet Close still voted with the commission to reject Transpower's plan. He believed the decision could be technically correct even if it was based on a flawed premise.

Close could be right about the flaws in the test, but his objection looks - at the very least - inconsistent when set against his vote.

Equally, commission chairman Roy Hemmingway can claim the test is valid. But Close's objections cast more than a grain of doubt over the commission's decision-making process. If such a lack of consensus is apparent in the public domain, what must discussions be like around the boardroom table?

Transpower and the regulator agree that the line is needed, the main point of difference is when. The commission says not until 2017 and not, as Transpower says, 2010. The commission says the delay will save New Zealand $250 million.

But the calculation of that $250 million difference is dependent on two very different views of the world. The commission, for instance, dismisses Transpower's view that the extra capacity of the line - which will make it easier to sell electricity generated by wind over the hills of the Wairarapa in Auckland - is worth $190 million.

The commission says that the line could be delayed even further if generators build more capacity closer to Auckland, suggesting it is willing to sanction the development of regional monopolies.

These are but two of the many differences between what is a rare alliance of the generators and Transpower, on the one hand, and the commission on the other.

No one suggests that Transpower should have untrammelled power to decide how the network is constructed and operated, but such a level of disconnection between those who are at the coalface and those who are watching is disturbing.

It is still early days for the decision to clamp down on Telecom. On first blush the measures announced by the Government - accounting separation, local loop unbundling and better access to wholesale broadband - look simple enough. And, if the $1.6 billion wiped from Telecom's sharemarket value is anything to go by, the measures should benefit many users.

However, the devil will be in the detail. For instance, local loop unbundling - which entails Telecom making available to competitors the copper pair linking the home phone to the exchange - is fiendishly complicated.

It requires the regulator to establish protocols as fiddly as the time of day when competitors' technicians are able to enter Telecom's exchanges and the exact number of square metres Telecom must make available in its exchanges for competitors' equipment. Deciding what colour a wheel should be may be simple in comparison.